Inside the Issue: The Future of US Airways

A year ago, as US Airways slid into its second bankruptcy, pundits predicted death.

How could it survive, they wondered, amid labor strife, bruising competition and surging fuel prices?

Against long odds, Charlotte's dominant carrier found a way. Heading out of bankruptcy, the airline sits poised to merge with America West Airlines this month.

Yet for all its Houdini-like escapes, challenges remain.

The same dire conditions that led analysts to forecast doom a year ago continue to bedevil the airline industry. Last week, Delta Air Lines and Northwest Airlines became the latest carriers to succumb to bankruptcy protection.

Given the tremendous challenges that continue to torpedo airlines, how long can the reborn US Airways survive?

Analysts say money pouring into the merger should allow the airline to stay afloat for at least a year or two. Beyond that, they say, its fate rests on a mix of management skill and raw luck.

Cash on hand

US Airways' biggest protection against immediate problems is its pile of cash.When the America West deal closes, scheduled for Sept. 27, the combined airline expects to have about $2.5 billion on hand. The money comes from the airlines' current holdings and the sale of some assets, plus new money from a variety of investors and vendors.

It's a lot of money for a company expecting about $10 billion in annual revenue, says Bob Mann, an airline analyst who's the financial adviser for America West's pilots' union.

"Cash is king," he said.

That stockpile will allow US Airways to endure repeated quarterly losses. It forecasts a $65 million loss in 2006 before turning $316 million in profit in 2007, according to court filings. But if those projections are optimistic -- and bankruptcy-court projections are often rosy -- the airline has a cushion.

Leaders of the new company say they aren't planning any spending binges.

"It's not in our DNA," Scott Kirby, the airline's executive vice president for sales and marketing, said in a recent interview.

Planning for savings

Yet to operate a successful airline, Kirby and his colleagues must do more than simply husband their cash.

Since announcing merger plans in May, America West chief Doug Parker has made his case -- to analysts, investors, employees and the news media -- about how they'll make money combining the two carriers.

The crux of the plan is this: Merge the airlines, eliminate overlapping management and software, cut 60 planes from the fleet, and gain additional passengers from having a route system that stretches from Hawaii to the West Coast to the Caribbean to Europe. The airline expects those changes alone to save at least $600 million a year.

Parker's predictions are gaining converts. Over the summer, the merger continued to attract new investors, bringing total outside equity to $565 million, up more than $200 million since the deal was announced.

Parker, 43, is widely viewed as one of the industry's most promising leaders. He took over America West two weeks before the 9-11 attacks, yet steered it to a profit in 2003. The company lost money last year, but far less than most of its peers.

For the merger to succeed, Parker's team must continue to cut costs as it aligns flight schedules, ramps up marketing and manages what could be a tricky integration of labor groups, analysts say. Because of steep cost-cutting in bankruptcy court, the new US Airways is expected to have lower costs than other old-line carriers.

John Luth, chief executive of Seabury Group, which helped structure the deal, said in an interview this summer that the merger's success "is reducible down to executable management tasks, which aren't rocket-scientist-level kinds of tasks. ... They are things that can be accomplished with planning and effort and good management."

Fuel prices, competition

Still, with four of the country's top-seven carriers operating in bankruptcy court, it is becoming clear that airlines' financial woes are in large part an industrywide phenomenon, regardless of management skill. In other words, going forward, US Airways needs luck.The two major wildcards: oil prices and the competitive landscape.

If fuel prices recede, US Airways and other airlines can make money. If not, they almost certainly won't.

"It floats all boats or sinks all boats," said Mann, the analyst.

US Airways' financial projections, devised over the summer, are based on an average price per barrel at $57.60 in 2006 and $56.67 in 2007. Oil futures closed Friday at $63 a barrel.

Vaughn Cordle, chief executive of AirlineForecasts, estimates that US Airways will spend $460 million more on fuel next year than it estimated this summer.

At the same time, US Airways' fortunes also depend on its competitors' fate.

Parker and others are banking on the industry trimming planes -- something that seems certain after last week's bankruptcy filings by Delta and Northwest. A JPMorgan analyst wrote last week that he expects Delta to shrink by 15 percent, and Northwest's CEO said his airline intends to reduce its fleet.

The way US Airways sees it, fewer planes means less competition, and less competition means higher fares -- and healthier revenue. Last week, Parker said the airline's revenue projections already are beating earlier forecasts.

Some analysts, though, say revenue increases might be hard to sustain. Low-fare rivals, such as Southwest and JetBlue, plan to add 445 planes in the coming years, increasing their fleets by one-third. More planes would suppress fares.

"The real problem for these guys is that the traditional network carriers have been shrinking a little bit, but the low-fare guys are still growing," said Alan Sbarra, a former United financial analyst who became a consultant.

The first indication of the new US Airways' performance will come in late January. Then, analysts can compare its performance in the last three months of 2005 with financial projections devised over the summer.

Charlotte, home to 5,300 US Airways workers, will remain the airline's largest hub.

In a recent interview with the Observer, incoming CEO Doug Parker said he expects the airline to expand both in Charlotte and around the country, although it has no immediate plans to add flights.

"You'll see in five years a very strong US Airways here as the primary hub-and-spoke carrier, certainly as big as we are today, hopefully larger," he said. "If things go as well as we plan, there will be opportunities for growth."
-- TONY MECIA As airline readies for takeoff into post-Chapter 11 world, the question is whether cash and a clear strategy can conquer soaring fuel costs and tenacious competition